Physical assets do well at times of elevated inflation, while financial assets fare well when inflation is benign

Year-to-date, the benchmark Sensex has risen over 7% while gold and silver are down 4.5% and 6.34%, respectively. Photo: iStock

Mumbai: Attractive returns from equities and financialization of savings following demonetization have boosted retail investments in the stock market, even as investments in physical assets have fallen.

Year-to-date, the benchmark Sensex has risen over 7% while gold and silver are down 4.5% and 6.34%, respectively.

Ajay Bodke, chief executive officer (CEO) and chief portfolio manager (PMS) at Prabhudas Lilladher, said physical assets do well at times of elevated inflation, while financial assets fare well when inflation is benign. “Interest rates are going up globally, but it is not a high inflationary environment. So, when inflation is benign, there is a shift of investment from physical to financial assets. This is what has been playing out in the last few years. If inflation were to get out of control, global central banks may start tightening interest rates, that is when there may be a shift decisively out of financial assets to physical,” he said.

Bodke added that gold does well when a fear psychosis grips asset markets, as it is a safe-haven asset. Although there has been some turmoil in the global markets, there is no heightened risk aversion. “Typically, when there is a sharp knee-jerk fall in equity prices or increase in uncertainties around them, that is when gold prices start picking up. Gold is also a great hedge against inflation, as inflation globally has not increased much,” he said.

According to Motilal Oswal Securities Ltd, during the past five years, the share of (net) financial savings in households’ total savings has increased from a four-decade low of 31.1% in FY12 to 50% in FY17. “While the share of financial savings has risen by almost two thirds (from 30% to 50%), most of this increase appears to be on account of the decline in physical savings rather than higher financial savings. Although (net) financial savings have increased from 7.4% of gross domestic product (GDP) every year between FY12 and FY15 to 8.2% in FY17, physical savings have collapsed from 15.1% to 8.1% during the same period,” it said in a note on 11 July.

Though there are concerns ahead of the 2019 general elections, investors are still betting on an earnings revival to lift stocks, while rural economy is expected to be bolstered by government initiatives like higher minimum support prices, farm loan waivers and affordable housing initiatives.

Arun Thukral, managing director and CEO of Axis Securities, said mutual funds have invested approximately $10.4 billion in equities over the past six months as the retail flow (in the form of SIP) is steady with slightly upwards of $1 billion every month and it looks to be sticky given the shift in financialization of assets and investments for Indian investors who are now looking at equity investments from a long-term investment horizon.

“These retail inflows were supported by the earnings growth of 10% reported by India Inc. in FY18 over FY17 as against nearly flat earnings over two preceding financial years. We see a promising future for Indian equity markets for long-term investors. There would be short-term risk aversion following the global developments, but Indian equity markets would reward the investor as the economy unfolds. The corporate earnings are picking up; the monsoon is in place indicating better harvest followed by consumption-driven demand which will further support the earnings. The markets will sustain and build upon the gains as the earnings pick up,” he added.

Rusmik Oza, senior vice-president and head of PCG Research, Kotak Securities added that local flows led by systematic investment plans has led to mutual funds investing in equities. “For markets to deliver double-digit returns, we need both FIIs and MFs to be buyers in the market,” he said.